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Sunday, June 8, 2008

Did Greenspan Try and Pop the Internet Bubble?

It is a question that will likely mostly be interesting to economists and those rare few that follow the goings on of the Federal Reserve. Yet, it is a very important question as the direction of power that lawmakers want to hand the Federal Reserve gets determined. It is a question that I myself raised in my earlier criticism of Alan Greenspan's tenure. It is a question that I believe would be answered yes, and yet, only one that Mr. Greenspan himself could answer. I doubt he will ever reveal his intentions back in 1999.

The reason this question is important in determining the future of the Fed is because if he did, then he became a Fed chief drunk on power. Furthermore, he used his near unlimited power to do things that the Fed was never intended to get involved with. The Fed chief, after all, is not supposed to pop economic bubbles. Remember, Greenspan's aggressive rate increases in 1999-2000 contributed to putting the economy into a recession. Thus, if in fact he did try and pop the bubble, his action caused other economic problems even more severe.

Of course, Greenspan's action is in the past, and most importantly, we need to find relevance to the present. What should be troubling to everyone is that Greenspan had significantly less power than we are about to place in the hands of future Fed Chiefs. If Greenspan used significantly less power in manners the Fed was never supposed to, then the possibility is even greater that future Chiefs will do the same.

In procuring the deal that saw JP Morgan Chase buyout Bear Stearns, Ben Bernanke acted as an investment banker, rainmaker, and Fed Chief. Not only was no one troubled by his enormous power grab, but in fact, most folks cheered. Back in December, the Fed came in with sweeping regulations on mortgages. On top of all this, Bernanke has been aggressively lowering interest rates at startling speed. Recently, Bernanke has come out with newfound concerns over inflation even though his own aggressive rate cut posture lead directly to many of those concerns.

As all of this is going on, we have the Congress considering giving the Federal Reserve massive new powers. Right now, the Federal Reserve has oversight responsibility over banks only. The Congress is considering extending that regulatory authority to any "financial services" company. This would give the Fed oversight over mutual funds, investment firms, mortgage brokers, accountants, and even private equity firms. If you handle money, it is likely the Fed can set regulations into how you conduct your business.

Not only is this happening but most folks are enthusiastically cheering it. Everyone needs to remember that in 1999 Alan Greenspan was at the height of his popularity. He was seen as an oracle and someone who could do no wrong. Did this perception lead to his belief that he really could, and worse should, do anything? That we may never know, however we are putting this current Fed chief in a similar position. Furthermore, we are putting future Fed Chiefs into positions in which they can do almost anything they please. It is very troubling to see an organization, the Federal Reserve, that is not understood by the general public given this much power. It is even more troubling that almost no one talks or concerns themselves with the enormous power they have. Even though there is great evidence that the prior chief already misused his enormous power.

The Federal Reserve will always be an organization with an enormous amount of power. With such an entity, the first concern is to make sure that their power doesn't become too great, and yet, politicians, business leaders, and the public at large are perfectly comfortable lavishing the group with even more power. I believe that nine years earlier we already saw what happens when that power was abused by the Fed chief. It is only a matter of time before even more power, now lavished on future chief's, will be abused even worse.


Anonymous said...

As someone actively involved in internet bubble stock bubble, yes, Greenspan tried to pop it. The market would drop as the Fed committee meeting came, then would rally after they agreed to only raise rates by a 1/4 point.

What really stopped the music was the government's suit to stop Microsoft. Not that what was what was wrong, but that was the excuse everyone used to get out an end the bubble.

Anonymous said...

I also recall Bill Clinton and Tony Blair openly calling for government to share the profits of new medical technologies. I believe this affected the med tech stocks. I remember a lot of the "market froth" switching back and forth between internet/communications tech stocks and med tech stocks.